House Republicans — led by House Budget Committee Chairman Paul Ryan (R-WI) — released their 2012 budget today. The plan includes a giant tax cut for the wealthy, as well as a complete dismantling of Medicare and Medicaid.
But it also includes a gift for Wall Street, in the form of a repeal of the provisions of the Dodd-Frank financial reform law that protect taxpayers from having to bail out failed financial institutions. Here’s how the House Republicans framed their repeal effort:
Although the bill is dubbed “Wall Street Reform,” it actually intensifies the problem of too-big-to-fail by giving large, interconnected financial institutions advantages that small firms will not enjoy. While the authors of Dodd-Frank went to great lengths to denounce bailouts, this law only sustains them.
The Federal Deposit Insurance Corporation (FDIC) now has the authority to access taxpayer dollars in order to bail out the creditors of large, “systemically significant” financial institutions. CBO’s expected cost for this new authority is $26 billion, although CBO Director Douglas Elmendorf recently testified that “the cost of the program will depend on future economic and financial events that are inherently unpredictable.” In other words, another large-scale financial crisis in which creditors are guaranteed to get government bailouts would cost taxpayers much, much more. This budget would end the regime now enshrined into law that paves the way for future bailouts.
The provisions in question — which Ryan dubbed “permanent bailout authority” in a Wall Street Journal op-ed today, reviving a key GOP talking point from the financial reform debate — are actually two distinct parts of the financial reform law. The first allows the Financial Stability Oversight Council (FSOC) to designate some firms as systemically significant and subject them to stiffer regulation.
The second, known as resolution authority, allows the Federal Deposit Insurance Corp. to unwind failing firms that, because they are so large and interconnected, can’t go through traditional bankruptcy. The FDIC recoups any costs incurred by selling off the assets of the company that was dissolved. The big bank lobbying groups — including the American Bankers Association and the Financial Services Roundtable — oppose resolution authority. “You don’t want to create a system that raises great uncertainty and changes what institutions, risk management executives and lawyers are used to,” said Edward Yingling of the American Bankers Association.
These provisions correct two key problems that plagued the pre-2008 financial system: giants firms didn’t have to adhere to stricter standards and the government had no tools to unwind them when they failed. The House GOP budget would return the regulatory system to this standard.